Buyback Announcements Often Lack Backup

February 17, 1997|By The Wall Street Journal.

In one door, out the other.

Although companies are announcing plans to buy back record amounts of their shares, the supply of shares appears to be still growing. Months after announcing buybacks, many companies actually have more shares outstanding.

Between executive and employee option plans, stock acquisitions and other factors, the supply of equity shrank last year by far less than record buyback announcements imply, if it shrank at all.

"For many companies, the announcement or even completion of the buyback doesn't necessarily reduce the shares out," says Melissa Brown, head of quantitative research at Prudential Securities. "It may have all sorts of other benefits for the shareholders, but in many cases it doesn't reduce the supply of stock out there."

Thus, with the Dow Jones industrial average rising, investors who look to shrinking stock supply to support heady stock prices might be getting "a false sense of security," she says.

For example, Monsanto's shares jumped 3 percent last spring when it said it would buy back more than 40 million of its shares, adjusted for a stock split. But since then, its shares outstanding have risen by 7 million, to 584.4 million. A spokesman says the program has been inactive so that the company can make acquisitions, allowing the number of shares outstanding to creep up through the exercise of executive and employee stock options.

Last February, Xerox's stock jumped 4 percent when it said it would buy back as much as $1 billion of stock, or about 24 million shares. Two weeks ago, it reported spending $306 million repurchasing 6.5 million shares through the end of 1996. Yet in that time its shares outstanding fell only 1.3 million, mainly because of shares issued for employee stock options.

In 1996, announced share-repurchases hit a record $176 billion, according to Securities Data Co., compared with 1995's previous high of $99 billion. Yet the actual stock shrinkage is far less.

Securities Data recorded just $30.8 billion in completed buybacks in 1996, up slightly from $29.3 billion in 1995. However, Rick Escherich, a managing director for mergers and acquisitions at J.P. Morgan & Co., says the record improves when partial completions are included. He calculates the industrial companies in Standard & Poor's 500-stock index bought back $44.8 billion in the first nine months of 1996, compared with $63.8 billion in announced buybacks. Over the past eight years, actual repurchases equal about 85 percent of announcements, he says.

Nonetheless, he says, the gap between announced and actual repurchases has widened recently because of "a tendency toward companies announcing programs that they'll execute over a longer time frame."

Even when shares are actually repurchased, the effect might be diluted or even overwhelmed by new shares flowing out for other purposes.

Birinyi Associates, for example, calculates that S&P 500 companies bought back 1 billion shares last year but issued 2.9 billion, for a net issuance of 1.9 billion shares (excluding the effect of mergers and acquisitions), the highest net issuance in at least 11 years.